Table of ContentsHow To Invest In Mortgages for DummiesAll about Why Do Mortgages Get SoldNot known Incorrect Statements About How Do Escrow Accounts Work For Mortgages
What I want to finish with this video is discuss what a home loan is however I think the majority of us have a least a general sense of it. But even better than that really go into the numbers and understand a little bit of what you are actually doing when you're paying a mortgage, what it's made up of and just how much of it is interest versus just how much of it is in fact paying down the loan.
Let's say that there is a house that I like, let's say that that is your house that I wish to purchase (non-federal or chartered banks who broker or lend for mortgages must be registered with). It has a price of, let's state that I require to pay $500,000 to purchase that home, this is the seller of the home right here.
I would like to purchase it. I wish to purchase your house. This is me right here - what are mortgages. And I've had the ability to https://johnnyvrkx860.shutterfly.com/22 save up $125,000. which type of credit is usually used for cars. I've been able to conserve up $125,000 however I would truly like to reside in that house so I go to a bank, I go to a bank, get a brand-new color for the bank, so that is the bank right there.
Bank, can you lend me the rest of the quantity I need for that home, which is essentially $375,000. I'm putting 25 percent down, this right, this right, this number right here, that is 25 percent of $500,000. So, I ask the bank, can I have a loan for the balance? Can I have a $375,000 loan? And the bank states, sure, you appear like, uh, uh, a great person with a great job who has a good credit ranking.
We need to have that title of the house and as soon as you settle the loan we're going to provide you the title of the home. So what's going to occur here is we're going to have the loan is going to go to me, so it's $375,000, $375,000 loan.
However the title of the home, the file that states who in fact owns your home, so this is the house title, this is the title of your home, home, home title. It will not go to me. It will go to the bank, the home title will go from the seller, possibly even the seller's bank, maybe they haven't paid off their mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a home loan is. This pledging of the title for, as the, as the security for the loan, that's what a mortgage is. And really it originates from old French, mort, indicates dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it comes from dead promise.
An Unbiased View of Why Do Banks Sell Mortgages
Once I settle the loan this pledge of the title to the bank will pass away, it'll come back to me. Which's why it's called a dead pledge or a home loan. And probably due to the fact that it comes from old French is the reason we don't state mort gage. how much can i borrow mortgages. We state, mortgage.
They're actually describing the mortgage, mortgage, the home loan. And what I wish to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually reveal you the math or in fact reveal you what your home loan payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash home loan calculator, home loan, or actually, even much better, just go to the download, just go to the downloads, downloads, uh, folder on your web internet browser, you'll see a bunch of files and it'll be the file called home mortgage calculator, home mortgage calculator, calculator dot XLSX.
However simply go to this URL and then you'll see all of the files there and after that you can simply download this file if you desire to play with it. But what it does here remains in this sort of dark brown color, these are the assumptions that you could input and that you can change these cells in your spreadsheet without breaking the whole spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had conserved up, that I 'd discussed right there. And then the, uh, loan amount, well, I have the $125,000, I'm going to need to borrow $375,000. It calculates it for us and after that I'm going to get a pretty plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate home loan, fixed rate, fixed rate, which implies the rate of interest won't change. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the cash that I borrowed will not change over the course of the 30 years.
Now, this little tax rate that I have here, this is to in fact determine, what is the tax cost savings of the interest reduction on my loan? And we'll talk about that in a 2nd, we can overlook it for now. And then these other things that aren't in brown, you shouldn't mess with Visit this link these if you actually do open up this spreadsheet yourself.
So, it's actually the annual interest rate, 5.5 percent, divided by 12 and a lot of mortgage are compounded on a regular monthly basis. So, at the end of monthly they see just how much cash you owe and after that they will charge you this much interest on that for the month.
A Biased View of How Mortgages Work
It's actually a pretty intriguing problem. However for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent rates of interest. My mortgage payment is going to be approximately $2,100. Now, right when I bought the home I want to introduce a bit of vocabulary and we have actually discussed this in a few of the other videos.
And we're assuming that it deserves $500,000. We are presuming that it's worth $500,000. That is a possession. It's an asset due to the fact that it provides you future benefit, the future advantage of having the ability to live in it. Now, there's a liability against that property, that's the home mortgage loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your properties and this is all of your financial obligation and if you were basically to offer the properties and settle the debt. If you offer your home you 'd get the title, you can get the cash and after that you pay it back to the bank.
But if you were to relax this transaction immediately after doing it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your initial down payment was but this is your equity.